Microsoft And Alphabet’s $250 Billion Stock Plunge Fuels Fears Of Earnings Recession

Tech Industry

Topline

Shares of Microsoft and Alphabet extended losses Wednesday morning after the technology giants slashed earnings forecasts for the rest of this year as a result of the increasingly murky economic outlook—signaling upcoming earnings from giants like Meta and Twitter may also disappoint investors.

Key Facts

Though Microsoft beat sales and profit expectations last quarter, its stock plummeted 8% Wednesday morning to about $230 after the firm said it would work to temper costs “materially” throughout the year as revenues in the current quarter could fall nearly $3 billion short of expectations.

Shares of Alphabet plunged a steeper 9% after the Google parent missed third-quarter sales and profit expectations in its after-hours report and said it would also focus on cutting costs this quarter; the company’s YouTube advertising unit especially posted a much weaker-than-forecast $7.1 billion, versus average expectations of about $7.5 billion.

“It was an ugly night for tech earnings,” says analyst Adam Crisafulli of Vital Knowledge, pointing out YouTube advertising is less resilient during economic downturns (as is social media generally) than Google’s search-engine arm—a concerning sign ahead of earnings from Meta and Twitter this week.

Combined, the cratering share prices of the nation’s second- and third-most valuable companies (behind only Apple) erased about $253 billion in market value ($148 billion from Microsoft and $105 billion from Alphabet)—pushing both stocks toward nearly two-year lows.

One bright spot: Amazon’s advertising business has historically been similarly resistant to Google search, which could bode well for earnings on Thursday, but shares of the firm nevertheless joined the tech rout on Wednesday, falling nearly 4%.

Forbes Valuation

The steep stock plunge has wiped billions from the fortunes of some of tech’s richest billionaires. Former Alphabet CEO Larry Page is worth an estimated $84.2 billion Wednesday morning. He’s down about $5.8 billion—making him the day’s biggest billionaire loser, according to Forbes estimates. Fellow cofounder Sergey Brin isn’t far behind. His fortune fell $5.2 billion to $81.1 billion, while the net worth of former Microsoft CEO Steve Ballmer dropped $3.9 billion to $77.4 billion.

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What To Watch For

This week marks the busiest for earnings season, with 43% of S&P companies slated to report, but 25% of consumer discretionary firms like Walmart aren’t slated to report until mid-November. Bank of America forecasts sentiment could get “incrementally more negative” as the season progresses.

Key Background

The stock market has been in flux this month after aggressive interest rate hikes this summer pushed major indexes into bear market territory. As signs indicate the Federal Reserve may soon pause the hikes, which work to combat inflation by tempering consumer demand, the S&P 500 has rallied about 8% the past two weeks. However, looming corporate earnings have been a huge source of uncertainty. In a recent note, Morgan Stanley analysts said it’s a “bad idea” to assume the gains will be long-lived because a slew of emerging risks—including economic weakness in Europe, the dollar’s strength and China reopening uncertainty—will likely hamper company earnings in the next two quarters.

Crucial Quote

“The moment the Fed decides to put out the fire [by pausing interest rate hikes], stocks and other risk assets are likely to rally sharply,” says Morgan Stanley strategist Michael Wilson. “However, trying to play that for more than a tradable bounce is a bad idea… because we still have to deal with the oncoming earnings recession, which is likely to pick up steam this earnings season and next.”

Surprising Fact

Morgan Stanley projects the S&P will ultimately hit a bear-market low of between 3,000 and 3,400 points—suggesting the index, which is already down 20% this year, could still plummet another 10% to 20%.

Further Reading

Stock Market Poised For Bigger Losses As Economy Enters ‘Danger Zone,’ Morgan Stanley Warns (Forbes)

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